10 questions to ask before selling your business to private equity
Coming from a background in manufacturing, contracting and distribution, I’ve seen the private equity realm from multiple perspectives. A common theme I found was that suppliers were frustrated by private equity buying up their best customers, impacting relationships, and overextending manufacturers and distributors. It wasn't seen as a true partnership. But to me, respecting and maintaining the relationship between manufacturers, contractors and distributors is vital to succeeding in the building and remodeling industry.
By fostering a true partnership between the private equity group, the contractor, the distributor and the manufacturer, all parties can benefit significantly if the relationship was built on the right foundation. It’s crucial for business owners to carefully consider who they partner with.
Here are 10 questions you can ask to ensure you sell your business to a firm that aligns with your goals, values and vision.
1. What is my personal life goal?
The first question I always tell people to ask is “What is your personal life goal?” What do you want to do for the next 10, 20, 30 years?
It can be difficult to enter the private equity world and determine your path if you’re unsure of that answer. Do you just want to sell and get the most money, or do you want to stay engaged with your business and grow? Your answer will determine the factors important to you when initiating the sale of your business.
2. Who am I partnering with?
By far the most important part of this process is selecting the right partner and understanding their expectations, limitations and practices. Conduct thorough research on the private equity firm(s) you’re considering. Ask them for a list of their partners, and talk to every individual. Find out if it is what they expected, were there any surprises, and are they happy?
When it comes to the operating company itself, meet the CEO, the chairman of the board and the leadership team. Use your intuition and judgement to evaluate how this relationship will make you feel. This is one of the biggest decisions you make as a business owner, and you want to be sure it's with people you trust, respect and will enjoy working with post-transaction.
3. What’s the firm’s track record?
Beyond making sure you’re partnering with people you trust, look at the financial performance of the partner companies to evaluate the success the firm has had.
Red flags to monitor include a lack of industry expertise and poor treatment of past acquisitions. It's essential to thoroughly evaluate potential partners by reviewing their track record, business practices and how they have handled other investments.
4. What is the firm’s growth strategy for my business?
A clear understanding of the private equity firm’s goals for your business helps you determine whether their strategy aligns with your goals. Key considerations include whether they prioritize organic growth, strategic acquisitions or cost-cutting measures.
Knowing their approach ensures you’re partnering with a firm that can sustain and enhance your business’s success.
5. What is the full structure of the deal?
This is a crucial question that everyone selling their business should ask before moving forward with a sale. Start breaking down the deal structure by first asking: What’s the multiple I’ll receive up front? Take that question a step further by determining if there is an earn out, or a second year multiple. Beyond the initial payout, look at how you can reinvest.
You want to understand if the private equity firm allows you to reinvest in the parent firm or just on a local level. Is there a minimum number you must reinvest each year? Understanding this part of the deal ensures you have a stake in the business's future growth.
Ask the firm what kind of stock you’ll receive. Is it local stock or parent company stock? Will you receive performance shares? Get transparency into how the share prices are determined, and ensure the reinvestment valuation aligns fairly with the sale valuation. Do you own the same stock that the other partners across the country own? It’s up to you to do the research and understand the dynamics.
Discuss tax implications, tax effectiveness and escrow terms. An experienced advisor can help you navigate these complex details to ensure you receive the deal you expect.
6. What changes should I expect post-sale?
No matter if it’s a big or a small change, this sale is going to impact your business in some way. Honest communication is vital — so ask questions about changes the firm plans to make up front, not down the line. Ask if they plan to change your brand, your operations or processes.
Common changes include accounting, centralization of human resources and benefits, national marketing efforts and financial tracking. Clarifying operational control and decision-making authority can prevent future conflicts.
7. Will the firm I’m partnering with have a liquidity event?
When considering a group to join, it's crucial to evaluate their long-term vision. An important factor to understand is if the firm you’re working with plans to have a liquidity event. Is it their goal to sell the business in a certain amount of time? That will factor into when you're going to get your reinvestment money back.
For example, take SRS in the distribution space—they consistently demonstrated success by maintaining their identity and leadership, even as they sold multiple times. This approach allowed their team to repeatedly benefit financially while continuing to build the business.
In contrast, some groups might be focused solely on a one-time roll-up and quick sale, with little intention of creating lasting value. For many owners, that can feel unfulfilling.
8. What can I do to maximize the value of my company?
Ensuring your company is in a place to realize the most value during a sale involves looking at a multitude of business operations. One of the first elements a firm will look at is your accounting. You may use QuickBooks or some other method of cash accounting, but almost all private equity firms will evaluate your books using accrual accounting. Converting your results to the same accounting model will give them a more realistic understanding of what their valuation is and what it should be.
Many businesses prioritize growth by reinvesting heavily to expand. However, when preparing for a sale, it may be beneficial to shift focus slightly. Instead of solely driving growth, you might aim to achieve a record profit year. This strategy aligns with the interests of most private equity firms depending on those firms' goals, which typically base their valuations on the company’s most recent profitability, particularly the trailing 12 months.
By emphasizing profitability, businesses can position themselves more attractively for potential buyers. Focusing on profitability must also include proper job costing with costs matched to revenue in their proper periods.
9. How will the private equity firm support relationships with suppliers and customers?
As a business owner, you’ve likely developed strong relationships with your suppliers, dealers and customers. If that’s something you prioritize, it’s important to understand the private equity firm’s expectations when it comes to your partners. Do they require you to switch suppliers, or can you maintain your existing relationships?
Relationships with distributors are tailored to local market needs, ensuring better alignment and performance, so it can be advantageous to stay with your current partners. Where a private equity firm can add value is building partnerships with distributors at a national level, offering access to the entire group and collaborating on benefits. It should be a mutually beneficial and collaborative relationship for all parties.
It can also help to understand how distributors and suppliers view the firm. Ensuring distributors and manufacturers view the company’s involvement as a value-add rather than a detriment is a priority.
10. What is the best way to communicate this change to my team and maintain morale?
You don’t want this transition and major business change to surprise your employees. It’s important to be up front with leadership about going through a major process at the right time. Transparency ensures smoother transitions and builds trust. Key personnel from both the private equity side and the management team should meet before the deal closes to establish rapport and address potential compatibility issues.
Like we talked about in deal structure, it’s essential to clarify whether employees can buy stock, and if so, determine the type—localized stock, national platform stock, or performance shares. This helps structure incentives and supports employee engagement. Many employees are motivated by being part of something bigger, so addressing these questions early helps set expectations. Finally, fostering open communication and ensuring all stakeholders understand and are excited about the plan creates a shared vision and a positive atmosphere.
When deciding to sell your business to private equity, it’s all about trust, transparency and communication. Ensure you do your research and take the time to thoroughly review each part of the deal, your potential partner, and how this will affect your business, employees and industry relationships.
Jim Ziminski is chairman of the board for Omnia Exterior Solutions, a partnership platform for visionary roofing and remodeling firms.
